Treasury inflation protected securities are underperforming other government bond exchange traded funds as inflation inched up at its slowest pace in five months.
The iShares TIPS Bond ETF (NYSEArca: TIP) declined 0.1% over the past week, whereas the iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF) gained 0.5%. [Treasury Bond ETFs Don’t Look Frothy]
TIP, which track government bonds whose face value rises with inflation, has an effective duration of 7.54 years and a 2.11% 30-day SEC yield. IEF shows an effective duration of 7.84 years and a 2.9% 30-day SEC yield.
The consumer price index rose 0.1% in July after increasing 0.3% over June, reports Victoria Stilwell for Bloomberg. The so-called core measure, which excludes food and fuel prices, inched up a lower-than-expected 0.1%.
Observers argue that consumer prices remain relatively unchanged due to the sluggish global demand.
Additionally, the low inflationary pressure will give the Federal Reserve more room to keep rates at near-zero levels, bolstering the appeal for fixed-income assets. Rising inflation lowers the real rate of return on fixed-income yields.
“Some of the inflation concerns that you were hearing back in June will probably ease off a little bit,” Michael Feroli, chief U.S. economist at JPMorgan Chase & Co., said in the article. “It takes some pressure off the Fed to speed up rate normalization. There had been a lot of rhetoric about the Fed being behind the curve on inflation, and this probably takes some wind out of that.”
Consumer prices increased 2% year-over-year for the month ended July after a 2.1% year-over-year rise in June. The core measure was up 1.9% from July 2013. The Fed set a 2% inflation goal based on the Commerce Department’s price gauge that is tied to consumer spending, and the measure hit 1.6% in the 12 months through June.
“Lower inflation expectations also make inflation-hedging assets like TIPS less attractive,” according to Morningstar analyst Abby Woodham.
iShares TIPS Bond ETF
For more information on inflationary pressures, visit our inflation category.
Max Chen contributed to this article.